KBW Q1 results analysis suggests specialty is way ahead

Evidence provided by specialty insurers such as Beazley and Hiscox also suggests that the best bet for insurers is to continue to focus growth on specialty classes, particularly casualty. Diversification remains the key strategy in this tough market. Insurance analysts at investment bank KBW issued a slew of notes over the last week about the implications of the first quarter results of leading Bermuda and Lloyd's insurers. They conclude that the reinsurance market will continue to be tough. "Further rate deterioration during the January renewals has been well documented during FY14 [full year 2014 results] and we expect attention to turn on April renewals results and June/July expectations. In reinsurance lines there is no reason to expect a halt in margin compression with brokers even flagging further risk-adjusted rate reductions of 10% in Florida cat rates (JLT Re). Moreover, rates for US commercial lines are largely flat year to date, and we understand that casualty is not seeing rate increases either," stated KBW in a report on the Bermuda market.hideGiven these market conditions, reinsurance companies appear to have three options. These are; turn away business and cut costs, seek a merger with a rival or return capital to shareholders and sit tight. Bermuda-based Lancashire reported a typical first quarter experience for the sector and is expected to opt for capital repatriation, said KBW. The company reported gross written premiums 23% lower than last year and its result was again underpinned by further reserve releases. "There were no material catastrophes in the quarter and prior-year reserve releases were strong at $26m (17pp). Gross written premiums are down materially and given the market outlook, Lancashire is more likely to return capital to shareholders later in the year than retain it," said KBW. KBW said that reinsurance rates are down on average 10%. This, it noted, is described as broadly in-line with expectations. "Despite commentary of a floor being reached in cat bonds and ILW [Insurance-Linked Warranties] pricing there is still evident over-capacity across the board," it said. "However, by keeping its reinsurance spending flat, Lancashire has been able to buy more coverage with better T&C [terms and conditions]. With no signs that pricing pressure will abate any time soon and assuming no material large losses, Lancashire plans to return capital to shareholders later in the year," it added. In London, by contrast, Beazley's interim management statement showed a 6% growth in premiums. KBW pointed out that this came mainly from specialty lines, notably casualty that enjoyed rate increases of 4%. The group also reported surprisingly strong investment returns at 3.9% on an annualised basis. "We like Beazley's quality and its bias towards specialty casualty business that are less impacted by the intense market competition," stated KBW. "Specialty lines, Beazley's largest division, grew by 19% YoY [year on year] and have also experienced rate increases of 4%. Cyber business gets a special mention as a line which benefited within the division. Marine and reinsurance premiums shrunk on the back of rate decreases but this is hardly a surprise," continued the bank. The contrast in pricing trends between standard reinsurance and specialty lines was stark. "An overall rate decrease of -1% is better than expected as rate increases in specialty contained the extent of the pricing pressure elsewhere. Reinsurance saw rate decreases of 7% versus last year while marine, political risk and life also saw rate decreases of 4-5%. Direct property was slightly down at -1%," reported KBW. Hiscox reported a similar experience but managed to boost its reinsurance results through its own ILS platform, a case of if you can't beat them best join them, it seems. "Hiscox managed to offset competition pressures in big ticket Lloyd's business by growing specialty, marine and casualty. Gross written premiums in reinsurance are broadly flat...despite rate decreases but we understand that the topline benefits from premiums generated from Hiscox's ILS platform," noted KBW. Bronek Masojada, Chief Executive of Hiscox, commented: "It's been an excellent start to the year, flattered by a good claims experience and favourable foreign exchange movements. While the market has been tough, with a reduction in pricing in the big ticket businesses, we have continued to grow in our specialty lines and expand our ILS business."

KBW Q1 results analysis suggests specialty is way ahead

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